It is that time of the year when the City Council immerses itself into the establishment of a budget for the following fiscal year (July 1, 2011 to June 30, 2012). As most of you know, there have been many good financial years and some difficult ones. When revenues are expanding at a greater pace than expenses, the budget process is not that difficult. However, when revenues decline and expenses do not, opportunistic challenges are encountered at reducing expenses to be in line with revenues.

Foster City has looked at the financial projections for the next five years as input into making budgetary decisions for the next year. This budgeting methodology has served Foster City extremely well in the past and should continue to so in the future. Foster City has maintained an historical fiscal management philosophy to make sure that monies were spent prudently and in the best interest of its residents as well as put money aside to provide for those “rainy days”.

For Foster City, the good news is that for fiscal year 2010 - 11 which began on July 1, your City started with a reserve balance of $22 million. The bad news is that we will be looking at a deficit of over $5 million for 2010-11. At this rate, a simple calculation shows that we would be out of reserves in a little over 4 years.

To address this deficit, the City Council has set a goal of achieving a balanced budget (where expenses are equal or less than revenues) by fiscal year 2013-2104 and has asked city staff to make recommendations toward achieving that objective. The City staff has done an outstanding job of assessing their departments by prioritizing services into what they indentified as core, enhanced, and nice-to-have categories. In the next few months, it will up to the City Council to act on those recommendations and/or introduce some recommendations of our own. All of us have had the experience of belt-tightening in one form or another and that is the situation in which we find ourselves.

Municipalities exist to provide the services for its citizens where they do not have the where-with-all to provide for themselves and by doing so on a shared cost basis (i.e. police, fire, roads, etc.). As we identify expenses that should be reduced, that means some services will be reduced and some eliminated. And the reduced or eliminated services will have an adverse impact on some of our residents which is what makes the expense reducing process of the budget an agonizing and difficult one. Once a service is eliminated; there is a high probability that it will never be restored due to costly startup efforts so reductions in service levels should not be viewed from an economic standpoint alone.

The State remains in its self induced quagmire. Last year the State faced a $25 plus billion deficit and addressed it by pushing expenses into the future and by taking funds from local municipalities and school districts to name a few. The State raided Redevelopment Agency funds which in the past were used to redevelop run-down areas and create jobs. The cities countered by introducing Proposition 22 that passed overwhelmingly in the November election, to protect city revenues.

This year, again facing a $25 billion deficit, the newly elected Governor has introduced the term realignment into the State’s budget process along with elimination of the Redevelopment Agencies. Realignment means that some services once provided by the state will be pushed down to the counties. San Mateo County is already facing a $50 million deficit without the increased responsibility of providing the additional services. So what can we expect the county to do – certainly push some of the financial responsibility for additional services to the cities and to the citizens in the form of tax increases. The final financial impact to the City of the State’s budget process is unknown at this time but be aware that we are monitoring the situation very carefully.

The revenue side of the budget is and will continue to be affected by the economy and there are several indicators used to project the future economic outlook. One of those indicators is the unemployment rate. Recent unemployment predictions by the economic arm of the State are that unemployment will be reduced at a very slow rate. Unemployment is predicted to be reduced from the December, 2010 State-wide rate of approximately 12.3 % reducing to an approximate State-wide rate of 7% by the 2015-16 fiscal year. This is not a sign of robust growth for the State. However, there are signs that the economy is improving ever so slightly.

This is not a time for panic expense trimming but is a time for more prudent spending. We all hope the economy returns to better times. Be confident that your City leaders are working diligently to maintain the sound financial health of our City.